Investors punish bad-news biotechs

ValBrickates Kennedy

BOSTON (MarketWatch) -- Speculative investing in the biotech sector saw another casualty Wednesday, with shares of Inspire Pharmaceuticals losing more than 40 percent on word that a key clinical trial for its eye drug diquasol had yielded only mixed results.

Inspire's
ISPH, +4.46%
stock ended down 44.5 percent at $8.88 late Wednesday after the company said a Phase III clinical study had failed to meet a primary end point. While the company believed it would likely be able to proceed to the regulatory approval stage with existing data, it also said it was considering running an additional clinical study.

The Durham, N.C.-based company's tale of woe is far from an isolated case. Over the past two weeks, investors have run away from at least three other aspiring biotechs, namely Discovery Labs
DSCO
Maxim Pharmaceuticals
MAXM
and Axonyx
AXYX
all of which reported late-stage drug development problems.

While this might not be pretty, industry watchers note that such market reactions are to be expected.

"Investors are quick to pull the trigger. It's very typical for a drug developer to lose 30 percent to 70 percent on bad news," said Punk, Ziegel & Co. analyst Matthew Kaplan, who tracks such companies as Axonyx. "If a company only has one or two products in late-stage development, you'll see this."

But Kaplan added that evaluating whether a company's foundering drug is still viable can be tough, as the initial company statements generally only contain early data. And it can be weeks, even months, before more definitive data are analyzed and released to the public.

"The probability is hard to judge because don't have the full data yet," he explained, saying that Axonyx fell into this category. Inspire, he noted, was able to supply more detailed data.

But even if more definitive data are released, some investors just aren't interested in waiting around for the details.

"People don't take the time to find the meaning behind what's said in the press release," Kaplan added. "Most of the reaction is, 'This drug doesn't work, so forget it.'"

On Feb. 1, Discovery Labs said that it had been informed by the Food and Drug Administration that a plant contracted to manufacture its respiratory drug candidate Surfaxin was not up to par. As a result, a final FDA decision on Surfaxin, which had been expected mid-month, may now be delayed six months.

Investors drove the firm's shares down 22 percent on the news.

Maxim's troubles began in mid-January, when it revealed that the FDA had informed the company it needed to run another Phase III study for its oncology drug Ceplene. On Feb. 8, the biotech added that two Phase II clinical trials for Ceplene, one for hepatitis C and the other for kidney cancer, also had produced disappointing results.

As a result, the firm said it was being forced to undertake major layoffs and seek out strategic partners.

Maxim lost 20 of its stock value on that news; shares ended unchanged Wednesday at $1.82.

But investors dealt the harshest blow to Axonyx, which said on Feb. 7 that a key Phase III clinical trial showed its drug Phenserine to be ineffective in slowing the progression of Alzheimer's disease.

Axonyx lost more than 60 percent that day to close at $1.81; shares closed down a penny Wednesday at $1.82.

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